Despite the success of the Xbox, that was not Microsoft Corp.'s (MSFT) first choice plan in the gaming space, according to an IGN interview with a former Microsoft executive. Joachim Kempin, who was VP of Windows Sales at Microsoft for 20 years starting in 1983, says his former employer only decided to build the Xbox after a falling out with Japanese gaming giant Sony Corp. (TYO:6758).

I. Sony Console Worried Gates

The original Xbox and its successor, the Xbox 360, had their low points (red rings of death, for example), but have established themselves as a popular console gaming option, selling millions of units. The gaming unit is perceived as one of Microsoft's strong performing businesses.

Perhaps predicting both the rise of the console and tablet as replacements/challengers to the traditional PC, Bill Gates reportedly in the 1990s sounded the alarm when Sony announced the original PlayStation. Seeing Sony jump into the market, Microsoft became determined to beat its former partner, who was turning its back on PC gaming for a non-Microsoft alternative.

Describes Mr. Kempin:

The main reason was to stop Sony. You see, Sony and Microsoft…they never had a very friendly relationship, okay? And this wasn’t because Microsoft didn’t want that.

Sony was always very arm’s length with Microsoft. Yeah, they bought Windows for their PCs but when you really take a hard look at that, they were never Microsoft’s friend... but as soon as they came out with a video console, Microsoft just looked at that and said 'well, we have to beat them, so let’s do our own.

The original PlayStation launched in 1994. Then in 2000 Sony introduced the PlayStation 2, which added PC-like media player functionality and broader support for online gaming on third-party servers. A year later Microsoft countered with the Xbox.

II. Crafting a Console

The payoff of consoles -- by Sony's model, at least -- has traditionally been the licensing fees paid by game publishers. The hardware itself is often sold at-cost, or even at a modest loss. For that reason Microsoft had trouble convincing a PC maker to hop onboard the Xbox experiment.

Joachim Kempin, a 20 year veteran of Microsoft is spilling the dirt on the history of the Xbox.
[Image Source: Twitter]

Recalls Mr. Kempin, "I went out to several PC manufacturers and tried to beg them to do the Xbox thing and keep the device manufacturing out of Microsoft. The guys were smart enough not to bite, because they studied the Sony model and saw that Sony could not make money on that hardware model, ever. So they supplemented it with software royalties, and Microsoft copied that model."

As for Xbox profitability, he argues that developers have always been the winners; that Microsoft has managed to break-even, but not do much better than that. He comments, "They’re just maybe a little bit above breakeven, that’s all there is. This is not a big money-making machine for Microsoft."

A former Microsoft exec. claims the Xbox is not a big money-maker for the tech giant.
[Image Source: Gamasutra]

Microsoft is currently diving into a third-generation console, which is expected to launch this holiday season. After trumping Sony in the last generation (dubbed by some as the "seventh-generation") of consoles, there are some trouble signs for the upcoming Xbox 720. While the spec looks somewhat similar to Sony, Sony's hardware is reportedly slightly more powerful and considerably easier to develop for.

Microsoft also may alienate customers with its stance on used games; reportedly it is tying purchases to your Xbox Live account, as a means of stopping game resale (which it earns no cut from). Sony, while a long time support of strict digital rights management, has not yet announced a similar anti-resale provision.

Doesn't really matter it shows Microsoft is far from a one trick pony. I could even break out how many companies they partially own as well which are also money makers. Heck they have a 10% stake in Dell now. The are the largest charity as well. I don't see Apple or Google trying to put an end to malaria.

Every company has money losing divisions but when you add it all up Microsoft makes tons of money. They can afford to lose 2.5 billion. They probably made more than that on Android licensing. If you look at the big picture over time if Microsoft can corner the home media market there is a ton of money to be made there.

Microsoft is starting to chip away at the Phone market, the tablet market is questionable but Microsoft has deep pockets and they can play for plenty of years trying to establish one, and Google search will fall someday because Bing is actually really good or something better will eventually come along. Some things take a few years to establish. Im amazed at the people who think its easy to enter an established market base and expect a company to make tons of cash on year one.